Do Investors Value Uniqueness in Corporate Strategy? Evidence from Mergers and Acquisitions
Lubomir P. Litov
University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center
Todd R. Zenger
Washington University in Saint Louis - John M. Olin Business School
March 15, 2011
Using mergers and acquisitions as a testing ground we examine whether managers face conflicting incentives in selecting the uniqueness of their corporate strategy. We argue that firms that pursue strategies which assemble commonly-bundled assets may pay more for these assets, perhaps as a reflection of the greater degree of competition among rivals for them. On the other hand pursuing a common business strategy would likely lead to better stock market response as analysts might find it less costly to analyze such commonly observed strategies. We find that acquirers, who as an outcome of their acquisitions become more similar to their rivals, receive a significantly higher positive announcement return. A decrease from the top to the bottom decile of the measure of uniqueness of the corporate strategy of the post-merger company is associated with an increase in abnormal announcement returns (within -1 to 1 days around the announcement) of 1.01%. At the same time acquirers in the bottom decile of our uniqueness measure pay on average 13.6% more for their targets than acquirers in the top decile; they also have subsequent one-year-post-merger-closing profitability which is about 1.25% lower than their peer group with more unique corporate strategy. These findings are stronger for a measure of uniqueness that compares the post-merger company to the primary industry rivals that are covered by analysts. Overall we interpret our results to suggest a paradox between the market perception for the degree of uniqueness of corporate strategy and the subsequent corporate performance in mergers & acquisitions.
Number of Pages in PDF File: 39
Keywords: mergers and acquisitions, corporate strategy, analyst coverage
JEL Classification: G32, G34working papers series
Date posted: March 16, 2011
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